Discussion Paper Details

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Title: On the Indeterminacy of Determinacy and Indeterminacy

Author(s): Andreas Beyer and Roger E A Farmer

Publication Date: October 2003

Keyword(s): identification and indeterminacy

Programme Area(s): International Macroeconomics

Abstract: A number of authors have attempted to test whether the US economy is in a determinate or an indeterminate equilibrium. We argue that to answer this question, one must impose a priori restrictions on lag length that cannot be tested. We provide examples of two economic models. Model 1 displays an indeterminate equilibrium, driven by sunspots. Model 2 displays a determinate equilibrium driven by fundamentals. Both models have the same likelihood function and are therefore observationally equivalent.

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Bibliographic Reference

Beyer, A and Farmer, R. 2003. 'On the Indeterminacy of Determinacy and Indeterminacy'. London, Centre for Economic Policy Research.